January 31, 2019

Why, despite the technological revolution, does productivity growth remain weak?

by Denis Pennel

Few would deny that recent decades have seen huge advances in technology.  Since the dawn of the 21st century we have witnessed the creation of an ever-more interconnected world where a plethora of new technologies from apps and digital platforms through to 3D printing & 4G mobile networks have transformed the way we live and work. Businesses can track the movement of goods and services in real time and provide clients around the world with fast solutions and turnaround, 24/7.


However, despite the speed, efficiency and insights which these new innovations provide, they have had very little impact on productivity growth? Data from the World Economic Forum Global Competitiveness Index 2017/18 suggests that the reason that innovation often fails to drive productivity is due to an imbalance between investments in technology and efforts to promote its adoption throughout the wider economy.


In short, the correlation between technological advances and productivity is not automatic.  It takes time for major innovations to diffuse into society and business. Our history books confirm that at the start of any technological revolution, productivity will first actually slow down. Only once people become accustomed to new ways of doing things will new innovations be fully embraced with the result that society starts to reap the benefits.  Indeed, while today’s tech giants may at first appear to have a global reach, there are in fact still large areas of the globe where they have had little impact.



So, what does all this mean for labour markets in the future? As our economies move from manufacturing-based to services-based so we will see more low-level, productive jobs.  However, these do not necessarily bring economies of scale as greater numbers of customers does not automatically mean higher quality. Indeed, in the quality v quantity conundrum there is arguably no substitute for the personal touch which can only be achieved through face-to-face relationships, not through technology.


The economic sectors enjoying growth today and predicted to remain buoyant and provide employment in the years ahead, are in areas such as care, hospitality, retail and education. These are all what is classified as ‘proximity services industries’, where it is actually quite difficult to increase productivity based on technology. While businesses that produce goods may be able to use their resources more efficiently in order to boost productivity, businesses in the service sector are not usually able to reduce their main asset – people – without having a negative impact on productivity.


Over the past decade a number of economic factors have served to create a perfect storm that has put a brake on productivity growth – even in those economic sectors where technological advances might normally be expected to have a positive impact. The downward pressure on wages brought about by high levels of unemployment and the globalisation of labour markets has provided less incentive to embrace innovation.  So too has the ready availability of cheap credit which has allowed companies with low productivity to borrow money without the need for so vigilant an eye on their productivity levels.


Productivity is driven by a combination of ability and pressure. If there is a lack of competition (ie. pressure) then there is little motivation. This combined with a natural conservatism and aversion to embrace change (think of the Luddites of the 19th century) has meant that the advantages of new technologies and the prospect of producing more with fewer resources, have not been fully realised.


So what action needs to be taken in order to encourage productivity growth across our economies?  The World Economic Forum (WEF) describes the world as moving from the age of capitalism to talentism and predicts that talents will become increasingly more important than capital.  Along with financing innovation and technological adoption, and the spreading the benefits throughout the economy, WEF identifies labour market flexibility and worker protection as one of the key challenges that must be addressed if we are to drive productivity growth in the fourth industrial revolution.


I believe governments, business and civil society must work together to change labour market dynamics and implement policies that will create prosperity and growth across society.


Denis Pennel

Managing Director, World Employment Confederation



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